Housing's Big Fall

The impact may not be as dire as you think.

I remain very bullish on the ready mix industry over the next quarter century. But near-term, such as the coming year, the horizon seems very hazy. I still firmly believe that the industry will blow past 500 million cubic yards of annual production, sooner rather than later, and is on track to produce 600 million yards by 2030, which would be unprecedented.

But understandably, readers and my clients must make nearer-term business plans and are far more interested in the coming year. I have said repeatedly that the housing slowdown would have its effects on total concrete volume this year, even if offsetting gains from other construction sectors are taken into account.

So here is the head-scratcher: As we go to press, we have witnessed growth in total concrete production for every month in 2006 over last year. This is happening despite a severe housing downturn that seems to be getting even worse than earlier predictions in some of the formerly hot markets such as Florida, Arizona, and California.

If the industry continues at its current track, 2006 will still be a record year because of offsetting gains in non-residential and public sector construction. According to the Portland Cement Association, overall construction spending is expected to increase 1.5% in 2006, driven entirely by non-residential concrete demand.

History has a way of confirming this phenomenon in cyclical downturns. For example, 2001 was a record year for concrete production, bumping the 400 million yard mark for the first time. The following year, the effects of Sept. 11 and other factors drove the ensuing economic slowdown. Clients complained how difficult the climate was for their businesses, with many reporting significant slowdowns in their total volume.

Local concerns

Yet when the final numbers were in, concrete production for 2002 was down less than 1%. By 2003, the 2001 record was matched again, as the economy started to realize gains from a developing housing recovery in the face of the Federal Reserve Bank's unprecedented campaign of lowering interest rates. These cycles teach us that the downturns tend to be more localized. Often, the local perception is harsher than the broader reality when the industry is measured as a whole.

As this fall began, we have a previously unpredicted impact on the coming year: Gasoline prices have fallen dramatically, and analysts in that industry are split on whether this is a temporary pause or a medium-term trend. Pump prices fell 24 cents a gallon in two weeks in September and 66 cents over a six-week period.

Nothing affects consumer sentiment more quickly than gasoline prices, to which consumers react immediately. The person who is pleasantly surprised at the cost of filling the gas tank feels better about heading to Wal-Mart and spending a little more. With consumer spending driving 2/3 of our economy, gasoline prices have the single biggest impact on the sentiment that drives inflation, the direction of interest rates, and the ensuing impact on the construction markets.

If this fall in gasoline prices continues, I see a stable year for concrete production in 2007, with production at least as strong as 2006.